How can an enterprenuer successfully dominate a nascent market by becoming the cognitive referent for that industry, having low competition and the leading market share?
The question framed above is answered elegantly by Felipe Santo and Kathleen Eisenhardt in the their paper “Constructing markets and shaping boundaries: Entrepreneurial Power in nascent fields“? Jim Collin’s book “Good to Great” is must-have book for any entrepreneur’s bookshelf, similarly, this paper by Santos and Eisenhardt should be a must-read for any entrepreneur. In this blog entry, I will try to summarize the gist of the article, however, I will recommend you to read the entire paper for specific examples and details.
According to the authors, successful entrepreneurs attempt to dominate nascent markets by co-constructing organizational boundaries and market niches using three processes: claiming, demarcating, and controlling a market.
Claiming the Market
Entrepreneurs use three identity mechanisms to claim a market: adopt templates, disseminate stories and signal leadership.
Adopt Templates is defined as using well-known cognitive models from other domains to convey a unique identity. This identity simultaneously makes a firm and its nascent market distinct, yet also familiar to market audiences. For e.g. Foursquare using the analogy of “check ins” from physical world to explain their service. Or, Cloud infrastructure providers using “public utility” template to highlight the utility-like natures of their service.
Disseminate stories is defined as spreading symbolic narratives (real or fictitious) to raise awareness about the firm and its market, and communicate the firm’s identity. For e.g., Salesforce using “End of Software” related narratives that caught attention of many reporters leading significant media coverage.
Signal leadership is defined as taking concrete actions that convey superior power and expertise within the market. For e.g,, Amazon early-on claiming to be “Earth’s Biggest Bookstore” to signal leadership.
Demarcating the Market
Although cognitive dominance is crucial, competitive dominance is also imperative. Even as entrepreneurs being establishing their identities and claiming their nascent markets, they also face considerable ambiguity regarding key dependencies and exchange partners. Moreover, they are usually surrounded by powerful established firms that may define the nascent market as part of their own existing market or as an attractive new market to enter. To avoid competition with powerful firms in nearby markets, entrepreneurs use three alliance mechanims: revenue-sharing agreement, equity investment and antileader positioning.
Revenue Sharing Agreeement is an alliance mechanism by which a partner firm benefits from a nascent market through distribution, advertising, or supplier contracts with a focal venture. Such agreements provide the partner with an industry role and revenues from the nascent market without directly participating. Thus established firms have an incentive to support the new firm and the nascent market.
Equity Investment is an alliance mechanism by which entrepreneurs allow partner firms to purchase financial stakes in their ventures. This enables these firms to benefit from the nascent market without participating directly. Although, enterpreneurs sacrifice ownership and may need to share private information, they also reduce the incentive of powerful firms to become competitors.
Antileader Positioning is an alliance mechanism used when there is a very strong firm dominating a proximate market. Entrepreneurs seek other established firms to join an alliance opposing this leader. For such an inviation to be credible, the market claimed by the venture must be seen as attractive for the leader to enter. If that is the case, the other established firms will the support the new firm in order to distract and counter the leader’s dominance. The downside is that entrepreneurs often alienate this dominate firm and are likely to become its rival.
Controlling the Market
Entrepreneurs try to control the market by overlapping their organizational boundary with the market boundary by using three types of acquisition mechanisms to control markets: elimination of competing models, increasing coverage, and blocking entry.
Elimination of competing models is an acquisition mechanism aimed at destroying the resources of threatening rivals. These rivals usually have resources or business models that could be superior or otherwise damaging to a focal entrepreneur’s control of a nascent market. After the acquisition, these resources are destroyed or blended into the acquiring firm to make its resource portfolio more robust.
Increasing coverage is an acquisition mechanism that expands an acquirer’s presence into emerging areas of a nascent market (e.g., new geographical regions,new categories of users) so that the boundaries of the market and firm continue to be aligned as the market expands.
Blocking entry is an acquisition mechanism aimed at removing possible stepping stones into a market. The possibility that established firms could easily enter the market by acquiring these rivals is the main concern being addressed, not fear of the rivals per se. This type ofacquisition often concludes with disposal of the acquired resources.